According to the bill…employees on H-1B visas will be restricted from working at the customer sites, although they can work from global delivery centres. Since all Indian IT companies are classified as H-1B-dependent employers, this provision would restrict them from placing their staff on H-1B visas (work visas) at customer sites.

Typically, Indian IT companies place people onsite for interfacing with clients, coordinating with the offshore teams and for critical development/support related work at client sites… So the debarment provision would disrupt this arrangement and would mandate placing only local employees at client sites.

The impact on the IT business would be dramatic, Mehta and Pappan say.

We believe the US immigration bill, if passed, would disrupt the current Indian IT business model, place it at a competitive disadvantage versus MNCs (IBM, ACN) and depress margins irrevocably. It has the potential to flatten sector earnings with EBIT margin drops of 150-400bps across companies and EPS CAGR cuts of 4-9% over FY13-16F, even if passed in a diluted form (excluding outplacement debarment).

INFO/TCS could be worst hit on our analysis among Indian IT stocks, with corrections of 8-10% assuming 50% probability of the bill passing in a diluted form. In the worst case scenario of all damaging provisions being passed, the correction could be as high as 30%, on our analysis.

As a result, the analysts downgraded Infosys and Tata to Reduce. Wipro (WIT), Cognizant (CTSH) and HCL Technologies (HCLTECH.NS) should be better able to withstand the changes, however. The analysts write:

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 5 comments

MAY 26, 2013 9:35 P.M.

Ram wrote:

It sounds funny that these so called 'tech' companies out of India have their profits driven by visas allocated by a sovereign country rather than technology or technical skills. These companies look like glorified travel agencies. The Japanese were in similar situation with their cars being sold in the US in the 1970s, but they let their technology i.e the cars do the talking and by the way they built factories here in the US and 99% of their employees were American.

MAY 29, 2013 2:42 P.M.

Altius Strategic Consulting wrote:

The analysis provided by Ashwin Mehta and Pinku Pappan, lacks an indepth understanding of the operating model of the WITCH (Wipro, Infosys, TCS, Cognizant and HCL) service providers. The WITCH providers prefer not too put warm boies in client locations, but rather do fix price/outcome based models. The overwhelming preference for customer interactions, if through proximity centers, rather having onsite boides. The IBM, ACN, GC are now learning that model and adopting it. I would have uptraded the stock price, as more the WITCH providers have lesser resources onsite, they increase their profitability (an 1% reduction in onsite engineering hours, is an 250 basis points increase in operating margins).

JUNE 5, 2013 7:23 P.M.

Arvind wrote:

Ram - If you are comparing Japanese car manufacturers of the 70s with India software providers of the 2000s, why don't you wait for 30 years. you speak so soon mate. My father used to scorn at the Chinese manufacturers in the 1970s. I recently gifted him an Apple ipad made in China.

JUNE 5, 2013 7:29 P.M.

Jathin wrote:

Why don't you guys buy Chevron or Exxon Mobile stocks, those are buoyed by Iraqi blood money. Which is better,? using hardworking smart engineers eager to work on your soil under your law or sending troops to a foreign country to plunder their wealth so that you can sustain your obnoxious oil consumption.

JUNE 12, 2013 9:59 P.M.

Ram wrote:

Arvind, you don't get it don't you? What products have the so called IT companies from India produced? Expect for shuffling labor they have done nothing!
They probably sponsor just 1% ( or less) of their employees here in US on visas for green cards! Reminds me of Indian workers in Gulf, who just work and transfer money to India with no affinity towards the adopted nation. Why would they when the gulf nations never let them become citizens. Similarly the so called IT companies from India don't let their employees affiliate with their host nation. The host nation is just a big cookie jar for the company and their employees..

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.